Free Markets, Free People
Federal Housing Authority and Freddie Mac: Betting against the homeowner
This should be a big story but in all likelihood it won’t be. But it gives you an insight to the depth of intrusion into the housing market by the federal government. Don’t forget, the official story is that the housing problem it is all the fault of big banks. Read this story carefully, because there is much here that should help explain why that just isn’t so:
First, the job of Freddie Mac according to this article:
Freddie’s charter calls for the company to make home loans more accessible. Its chief executive, Charles Haldeman Jr., recently told Congress that his company is “helping financially strapped families reduce their mortgage costs through refinancing their mortgages.”
Freddie Mac, along with its cousin Fannie Mae, was bailed out in 2008 and is now owned by taxpayers. The companies play a pivotal role in the mortgage business because they insure most home loans in the United States, making banks likelier to lend. The companies’ rules determine whether homeowners can get loans and on what terms.
The dirty little secret is they were always “owned” by the taxpayer. They were government subsidized entities (called “quasi-governmental”) whose policy was set by the federal government.
So who is in charge of Freddie Mac?
The Federal Housing Finance Agency effectively serves as Freddie’s board of directors and is ultimately responsible for Freddie’s decisions. It is run by acting director Edward DeMarco, who cannot be fired by the president except in extraordinary circumstances.
So let’s see, we now have a guaranteer of mortgages fully run by government (government can’t hide behind the “quasi” label anymore) and run by an essentially unaccountable bureaucrat is responsible for setting the “rules” which “determine whether homeowners can get loans and on what terms”. Yeah, no intrusion there.
Wonderful so far, yes?
So what’s our friendly little government institution that its CEO says is “helping financially strapped families reduce their mortgage costs through refinancing” been up too lately?
Betting against the success of its “charter”.
But the trades, uncovered for the first time in an investigation by ProPublica and NPR, give Freddie a powerful incentive to do the opposite, highlighting a conflict of interest at the heart of the company. In addition to being an instrument of government policy dedicated to making home loans more accessible, Freddie also has giant investment portfolios and could lose substantial amounts of money if too many borrowers refinance.
Note that one phrase in the second sentence before we move on: “In addition to being an instrument of government policy dedicated to making home loans more accessible …”. That’s something that left continually denies, but, in fact, led to the type borrowing that brought the housing market down. Both Freddie and Fannie have been “instruments of government policy” since their establishment. Anyone who continues to deny that is simply denying reality.
Moving on, however, you see an inherent conflict of interest which all the experts are trying to waive away as something “walled off” from the side which makes the lending rules for mortgages. No conflict they say (one has to wonder what government would say if the same conditions existed in a private concern).
But (there are lots of “buts” in this story), here’s the rub:
The trades raise questions about the FHFA’s oversight of Fannie and Freddie. But the FHFA is not just a regulator. With the two companies in government conservatorship, the FHFA now plays the role of their board of directors and shareholders, responsible for the companies’ major decisions.
Under acting director DeMarco, the FHFA has emphasized that its main goal is to limit taxpayer losses by managing the two companies’ giant investment portfolios to make profits. To cover their previous losses and ongoing operations, Fannie and Freddie already had received $169 billion from taxpayers through the third quarter of last year.
The FHFA has frustrated the administration because the agency has made preserving the value of the companies’ investment portfolios a priority over helping homeowners in expensive mortgages.
No conflict though. The rule maker is also prioritized profit over refinancing. Again, wondering about the private side of things, does anyone doubt that a private concern would be in the government’s crosshairs if the same things were as obvious there?
It’s a bit like state lotteries. If you start a numbers game, you go to jail. The state reserves only to itself the right to run numbers games. In this case, what would have the FBI raiding the place and grabbing computers if it was a private company is simply a “debate” within the government on whether or not there’s any problem here.
Even though Freddie is a ward of the state, top executives are highly compensated. Peter Federico, who’s in charge of the company’s investment portfolio, made $2.5 million in 2010, and he had target compensation of $2.6 million for last year, when most of these leveraged investments were made.
One of Federico’s responsibilities — tied to his bonuses — is to “support and provide liquidity and stability in the mortgage market,” according to Freddie’s annual filing with the Securities and Exchange Commission. Mortgage experts contend that the inverse floater trades don’t further that goal.
Sometimes it makes you wonder who serves whom, doesn’t it? I look at stories like this and tend to wonder if, in fact, we’ve finally transitioned from a government of the people to one that can best be likened to the mafia. As this story points out, the intrusion is to such a depth now that government priorities no longer reside on the side of serving the people, but instead on serving government and its bureaucracies.
Let freedom ring.